ARATA Corporation 2733
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Summary
A major wholesaler specializing in everyday goods and cosmetics. It buys products from manufacturers, sorts them at its logistics centers, and sells them to retailers such as drugstores.
DistributorsHealth Care Providers & Services
Key dates
2019-06-26
Coverage initiation
Executive summary
Business overview
ARATA CORPORATION mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company is one of just two major Japanese wholesalers specializing in everyday items, the other being PALTAC (TSE1: 8283). These two companies have a combined market share of nearly 50%. ARATA handles around 100,000 items such as cosmetics (Health & Beauty product category), detergents, and paper products bought from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to Japanese retailers (around 45,000 stores operated by 3,500 companies, including almost all domestic drugstores, supermarkets, and DIY centers). In FY03/21, ARATA posted sales of JPY834.0bn, and we estimate this figure would be around JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is equivalent to that of top-10-ranking retailers in Japan. Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time.
Over the past five years, the company’s GPM trended slightly over 10%. Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company can offer proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data, which it sometimes sells to retailers and manufacturers.
According to its Long-Term Management Vision 2030, ARATA is targeting annual sales of more than JPY1tn. It plans to expand sales by responding to changes in the business environment, developing products, and enhancing its overseas operations, while also working to improve productivity and management soundness. With the exception of sales, these targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22.
Trends and outlook
Full-year FY03/21 results were sales of JPY834.0bn (+4.7% YoY), operating profit of JPY11.5bn (+23.5% YoY), recurring profit of JPY12.1bn (+19.5% YoY), and net income attributable to owners of the parent of JPY8.2bn (+14.0% YoY). GPM was 10.3%, roughly in line with FY03/20, but the SG&A ratio declined 0.2pp YoY to 8.9% as ARATA limited the YoY increase in SG&A expenses to 2.3%. Amid the continued impact of the COVID-19 pandemic, profits at the operating level and below saw double-digit growth as productivity gains were made from promotion of new working styles that scaled back business trips and entertainment costs as well as meeting expenses through the use of online conferencing.
In November 2021, the company revised its full-year FY03/22 forecast. The revised forecast calls for sales of JPY836.0bn, operating profit of JPY12.4bn, recurring profit of JPY13.0bn, and net income attributable to owners of the parent of JPY8.7bn. ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan [ASBJ] Statement No. 29) effective from FY03/22. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and 6.1% YoY increase in net income attributable to owners of the parent. Compared to the previous forecast, the revised company forecast was an increase of JPY5.0bn in sales, JPY900mn in operating profit, JPY900mn in recurring profit, and JPY700mn in net income attributable to owners of the parent.
In November 2021, the company upwardly revised its medium-term management plan (FY03/21–FY03/23) targets. For FY03/23, it is targeting sales of JPY850.0bn (CAGR of 2.2% over three years), operating profit of JPY12.9bn (11.4%), recurring profit of JPY13.5bn (10.1%), and ROE of over 9% but less than 10% (8.8% in FY03/20). In FY03/21, amidst a fluctuating social environment, the company employed a variety of strategies, thereby improving its performance. Having achieved its targets for operating profit and recurring profit in FY03/21, the company lifted its targets for the current medium-term management plan ending in FY03/23.
Strengths and weaknesses
Shared Research thinks the company’s strengths are: 1) the logistics capabilities to deliver the right quantity of the right products to the right location at the right time, 2) the ability to advise retailers about how to create highly effective retail spaces, and 3) the information it accumulated leveraging handling volume that would rank the company as a top-10 retailer on an instore retail price conversion basis (based on Shared Research estimates). We believe ARATA’s weakness are its 1) relatively high logistics costs owing to its history of business combinations, 2) weak development capabilities overseas, where the company sees upstream and downstream growth opportunities, and 3) limited ability to respond to changing commercial channels amid the spread of e-commerce (see “Strengths and weaknesses” section for more details).
Key financial data
ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan Statement No. 29) effective from FY03/22. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and 6.1% YoY increase in net income.
Recent updates
Revision of full-year earnings and dividend forecasts, dividends of surplus, and upward revision of the medium-term management plan
ARATA CORPORATION announced revisions to its full-year FY03/22 earnings forecast, dividend forecast, and dividends of surplus.
Revision of full-year forecast for FY03/22
Reasons for revision
Based on the results for 1H FY03/22, the company has upwardly revised its full-year forecast for FY03/22.
Revision of dividend forecast
In the past, the company's basic policy was to continuously pay stable dividends, with consideration given to a comprehensive range of factors such as business performance, financial standing, and future business development. Going forward, ARATA will change its policy to one that considers the dividend payout ratio while taking into account stable dividends, targeting a payout ratio of 30%. The dividend forecast per share for FY03/22 has been revised to JPY121.0 (previous forecast: JPY105.0) in light of the upward revision of the full-year earnings forecast for FY03/22 and the change in the basic dividend policy.
The company announced an upward revision to its medium-term management plan.
(Click here to view the release.)
In November 2021, the company upwardly revised the medium-term management plan (FY03/21–FY03/23) it announced in August 2020. For FY03/23, the company is targeting sales of JPY850.0bn (three-year CAGR of 2.2%), operating profit of JPY12.9bn (11.4%), recurring profit of JPY13.5bn (10.1%), ROE in the 9% range (8.8% in FY03/20), and an equity ratio of 33– 35% (versus 33.2% in FY03/20).
Reasons for revision
Amidst fluctuations in the social environment due to the spread of COVID-19, the company employed a variety of strategies, thereby improving its performance. Having achieved its operating profit and recurring profit targets in FY03/21, the company revised up its current medium-term management plan (ending in FY03/23) targets.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. YoY change figures for FY03/22 have been omitted where FY03/22 figures are affected by the application of this standard.
1H FY03/22 results (out November 4, 2021)
The company began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. The following section outlines the impact from the application of this standard.
Variable consideration: Beginning in 1H, expected future returns and other items will be estimated and booked in accordance with defined variable consideration provisions and deducted from sales and cost of sales.
Consideration payable to a customer: A portion of expenses that were previously booked as non-operating expenses and SG&A expenses will be treated as consideration payable to a customer from Q1 and deducted from sales.
The impact from the application of the Accounting Standard for Revenue Recognition in 1H FY03/22 was JPY2.2bn for sales, JPY322mn for cost of sales, JPY1.8bn for SG&A expenses, JPY60mn for operating profit, and JPY21mn for recurring profit and pre-tax net income. Under the previous accounting standard, sales would have been JPY431.7bn (+1.6% YoY) and operating profit JPY7.2bn (+12.0% YoY).
With the near extinguishment of inbound demand due to the COVID-19 pandemic and the government’s declaration of a state of emergency contributing to fewer people going out, ongoing uncertainties over when the pandemic would be brought under control resulted in consumer spending in 1H being defined by a continued focus on saving rather than on spending.
In order to fulfil its mission of providing a stable supply of daily necessities to retailers, the company’s sales and purchasing departments worked to quickly identify changes in consumer lifestyles and purchasing behaviors, leading to sales. The company has made the health and safety of its employees at the logistics centers its top priority and has continued to take measures at these locations to prevent the spread of infections. The company also introduced staggered working hours and telecommuting at each of its sites to prevent COVID-19 infections and maintain operations, and enhanced productivity by curbing logistics costs.
Sales by product category
Sales by product category in 1H FY03/22 were as follows.
Due to the shift to a new lifestyle in which people spend more time at home and transition to telework, sales of large-volume, high-function, high-priced products in the Household category such as laundry detergents and household cleaning products were strong. Moreover, pet goods also performed well due to an increase in the amount of time spent with pets at home.
Sales were sluggish in COVID-19 infection control products such as masks and disinfectants, largely in reaction to increased demand for these products in 1H FY03/21. However, the public's awareness of hygiene remained high, and hygiene products fared better than before the spread of COVID-19. Demand for cosmetics deteriorated in 1H FY03/21 as people refrained from going out, but demand for basic skincare and makeup products recovered in 1H FY03/22.
Sales by customer type
Sales by customer type in 1H FY03/22 were as follows.
Full-year FY03/22 company forecast
ARATA has adopted Accounting Standards for Revenue Recognition (ASBJ Statement No. 29) effective from FY03/22. The YoY changes for FY03/22 estimates noted in the table above have been adjusted by applying the same accounting standards to FY03/21 earnings results.
In November 2021, the company upwardly revised its full-year forecast. The revised forecast calls for sales of JPY836.0bn, operating profit of JPY12.4bn, recurring profit of JPY13.0bn, and net income attributable to owners of the parent of JPY8.7bn.
ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan [ASBJ] Statement No. 29) effective from FY03/22. Previously, calculation costs for orders taken via the electronic data interchange (EDI) backbone were booked as expenses, and sales discounts (JPY81mn in FY03/21) also were booked as non-operating expenses. Under the new standard, though, such costs will be deducted from sales. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and 6.1% YoY increase in net income attributable to owners of the parent.
Compared to the previous forecast, the revised company forecast was an increase of JPY5.0bn in sales, JPY900mn in operating profit, JPY900mn in recurring profit, and JPY700mn in net income attributable to owners of the parent. The company upwardly revised its full-year FY03/22 forecast based on 1H results.
The following explanation is based on the previous forecast, and Shared Research plans to update the section after interviewing the company.
With no real visibility as to when the COVID-19 pandemic will end, it is difficult to predict when inbound demand might recover. In FY03/21, the spread of COVID-19 led to increased sales of masks, hand soaps, disinfectant gels, and other sanitation products, but lackluster sales of cosmetics. ARATA estimates that in FY03/21, the pandemic boosted sales by around JPY2.0bn. While it sees this impact diminishing in FY03/22, the company expects to offset this with an increasing share of supplies to existing customers.
ARATA expects demand for sanitation products to fall back once COVID-19 infections are contained, but conversely looks for cosmetics demand to rise. In order to ensure that higher sales of cosmetics compensate for declining sales of sanitation products, the company has planned a number of initiatives. For example, it plans to start selling popular overseas cosmetics brands to drugstores.
Initial company forecast and results
Medium-term outlook
*ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan [ASBJ] Statement No. 29) effective from FY03/22. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and
*Company forecasts for FY03/23 and FY03/30 do not reflect the adoption of new accounting standards
In November 2021, the company upwardly revised its medium-term management plan (FY03/21–FY03/23) targets. For FY03/23, the plan targets sales of JPY850.0bn (three-year CAGR of 2.2%), operating profit of JPY12.9bn (11.4%), recurring profit of JPY13.5bn (10.1%), ROE of over 9% but less than 10% (versus 8.8% in FY03/20), and equity ratio of 33–35% (versus 33.2% in FY03/20).
Amidst fluctuations in the social environment, the company employed a variety of strategies, thereby improving its performance. Having achieved its operating profit and recurring profit targets in FY03/21, the company revised upward its targets for the current medium-term management plan ending in FY03/23.
The below comment is based on the medium-term management plan prior to revision.
In May 2020, the company announced its Long-Term Management Vision 2030, which covers the period up to 2030, prior to the medium-term management plan. As part of this vision, the company aims to achieve sales of over JPY1tn. The company has positioned the current medium-term management plan as the first phase toward achieving its Long-Term Management Vision 2030.
FY03/21 sales were JPY834.0bn (+4.7% YoY), operating profit was JPY11.5bn (+23.5% YoY), recurring profit was JPY12.1bn (+19.5% YoY), and ROE was 9.4%. Thus with the exception of sales, all the above targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22, but will make no changes to its Long-Term Management Vision 2030. Under the new medium-term management plan, ARATA will continue to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
The basic strategy of the current medium-term management plan released in August 2020 is to achieve competitive sales activities and low-cost operations through marketing (product development and sales floor proposals) that takes into account changes in lifestyle and values due to progress of digital technology, and through labor-saving logistics centers using the latest technology. In following this strategy, the company plans to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
Expansion of growth potential
As measures to expand its growth potential, ARATA plans to respond to changes in the business environment, develop products, and enhance its overseas operations. The company handles about 100,000 items, mainly daily necessities. As the COVID-19 pandemic triggered significant change in consumer behavior, some products for preventing infection and catering to increased home consumption were in tight supply. ARATA has demonstrated its ability to respond to changes in the business environment by working closely with some 1,200 suppliers, including domestic manufacturers. It was able to carefully select products to prevent inferior ones from hitting the market—causing consumer issues—and ensure the smooth flow of daily necessities by implementing thorough infection prevention measures. The number of wholesalers able to respond rapidly to change in the business environment is limited, even in Japan, so ARATA stands out for its careful response in the face of the pandemic. It hopes to steadily increase its market share as a major wholesaler in Japan by further winning retailers’ trust.
The company aims to enhance its in-house product development. It will not change its stance of focusing on national brands from major manufacturers, but intends to increase its range of exclusive products by collaborating with manufacturers to plan and develop unique, high value-added products. It will also consider introducing to Japan products with a proven track record in Asia or other regions (ARATA will apply for the necessary permits and licenses). It has already introduced unique products such as Fabrush unscented fabric softener and Yakuyou 24stock deodorant mist. It aims to put more effort into such products as they provide a good means to retain customers.
ARATA also plans to lay the groundwork for further overseas expansion. Since 2012, the company entered the China, Thailand, and Hong Kong markets. These moves have contributed to expanding overseas sales of Japanese products but so far made only a minor contribution to the company’s earnings. In September 2020, ARATA announced a comprehensive business alliance with Chinese company Guangzhou Public Investment Holding Group Co., Ltd. (GPIHG). In October 2020, the company established a new company in Vietnam, and announced a capital alliance in July 2021. ARATA intends to expand sales channels for Japanese products in China and Vietnam through this companies, and to drive growth with sales of Chinese products in Japan. In addition, in the medium to long term, the company will endeavor to expand sales across the ASEAN region.
Improvement in productivity
Anticipating sales expansion, ARATA aims to improve profitability by increasing productivity. The current medium-term plan lays out a policy of improving productivity with the keywords of standardization, IT, and outsourcing. Specifically, the company’s measures include: 1) reducing variable costs with the latest IT and reorganizing logistics centers; 2) optimizing the allocation of personnel by forecasting logistics work volumes; 3) optimizing freight rates by improving loading efficiency; 4) standardizing and systematizing (RPS and loose coupling) back office functions and reducing fixed expenses through outsourcing; and 5) reducing fixed expenses through telework (from home), mobile work, and work at satellite offices.
Regarding the reorganization of logistics centers, the focus is on the construction of logistics centers that cover Greater Tokyo and the Kansai area. The company has confirmed that the introduction of the latest IT and equipment at its Kyushu Minami Logistics Center has improved productivity, including reducing the number of employees needed. It thus aims to improve productivity by making its logistics centers more efficient.
One of ARATA’s priorities is to improve loading efficiency and optimize freight rates. Logistics efficiency has been deteriorating due to labor shortages and other factors. In FY03/15, packing and transportation expenses were 2.51% of sales, but rose to 2.76% in FY03/20. The company plans to keep logistics expenses in check by implementing initiatives to improve delivery efficiency, and strengthening cooperation with major delivery companies to improve loading efficiency.
Wholesalers of daily necessities must continuously strive to improve productivity as it is generally considered a low-margin business. At present, ARATA has not indicated expected levels of productivity improvement for individual product categories. It will thus be necessary to pay attention to the company’s earnings results to confirm the effect of productivity improvement measures.
Strengthening management soundness
The medium-term management plan has set growth in the equity ratio and ROE by reducing total assets as priority issues. The company targets an equity ratio of 33–35% (33.2% in FY03/20) and an ROE of over 9% but less than 10% (8.8%). In the wholesaling industry, the balance sheet tends to expand as business grows. ARATA says it will improve accounts receivable, inventory, and accounts payable while reviewing fixed assets and implementing flexible capital policy. However, the financial function of the wholesaling industry (collecting funds from retailers and sending money to manufacturers) has often been touted as one of its important functions. Trying to forcibly shorten the collection period for accounts receivable may affect business. How the company will go about reducing total assets warrants attention moving forward.
Financing plan
The company expects to secure operating cash flow of over JPY35bn in three years if the medium-term management plan progresses smoothly. It plans approximately JPY30bn for capex. Main investment projects are: 1) strengthening of logistics: construction of new distribution centers in Greater Tokyo and the Kansai area, and labor-saving equipment at existing distribution centers; 2) automation-related system investment: expenditures for an automatic ordering system based on shipment volume forecast by AI, and automation of operations using RPA and AI optical character recognition (AI-OCR); 3) improvement of the telework environment; 4) strengthening of the BCP system: investment in information security and emergency backup systems; 5) enhancement of the management and sales support systems; 6) strengthening of product development capabilities in health, hygiene, and cosmetics; and 7) strengthening of the field business (store support) and customer analysis functions. The company particularly emphasizes investment in logistics. It has 11 large distribution centers nationwide, each with annual shipments of over JPY15bn. Including small distribution centers, the company has 43 locations nationwide (five in Hokkaido, five in Tohoku, 12 in Greater Tokyo, five in Chubu, four in Kansai, seven in Chugoku/Shikoku, and five in Kyushu). ARATA’s logistics capacity in Greater Tokyo is approaching full, and the company aims to get an early start in expanding it.
During the three years under the current medium-term plan, the company plans to pay about JPY5bn in dividends as shareholder returns, based on its policy of paying stable dividends.
“2030 Future Vision”
Amid difficulty in projecting the near-term earnings outlook owing to the novel coronavirus pandemic, ARATA unveiled its “2030 Future Vision” in May 2020, outlining the direction the company wishes to take over the next 10 years, prior to announcing its medium-term management plan. This new management vision identifies “sales in excess of JPY1tn” as an earnings target, but sets no other quantitative objectives.
The “2030 Future Vision” has its roots in ARATA’s basic policy on corporate social responsibility (CSR), informed in turn by the company’s management philosophy of “continuing to serve the world.” The three pillars of the company’s basic policy on CSR are: 1) building a strong foundation by forming relationships of trust with all stakeholders; 2) taking a rational approach to boosting the efficiency of the overall supply chain; and 3) implementing business strategies that enrich the everyday lives of consumers while also ensuring that employees derive fulfilment from their jobs.
The message underlying the new management vision is one of “changing lives by fulfilling dreams,” leveraging the abilities of the company to fulfill mankind’s shared dream of continuing to lead prosperous and comfortable lives.
In terms of the quantitative value it offers, ARATA regards sales of JPY1tn as a mere point along the way toward further growth (sales in FY03/20 amounted to JPY796.2bn). It intends to cultivate its ability to generate profit and increase profitability and productivity through aggressive investment in logistics, IT, and personnel, with the aim of creating a virtuous cycle that can generate returns at an early stage. Qualitatively, ARATA believes its value to society lies in being a company that: 1) provides job satisfaction to employees, 2) contributes to supply chain optimization, 3) delivers rich and comfortable lives to consumers, and 4) operates in an environmentally friendly manner.
Strategy for realizing future vision is to act as “comprehensive producer of comfortable lifestyles”
ARATA is a wholesaler dealing primarily in daily necessities. In its “2030 Future Vision,” though, the company aspires to become a “comprehensive producer of comfortable lifestyles,” performing all manner of roles beyond that of distribution industry intermediary, and fulfilling the function of producer across the entire supply chain. More specifically, it aims to produce 1) items, 2) retail spaces, and 3) marketing.
Item producer: ARATA seeks to further flesh out its already broad array of products. In addition, the company aims to strengthen its capacity for planning and developing differentiated merchandise and collaborate with manufacturers and retailers in building a system supporting an abundant supply of appealing products. By selecting and handling appealing products, the company strives to gain advantage over competitors.
Retail space producer: In addition to building on its existing strength in providing brick-and-mortar stores with proposals for the creation of appealing retail spaces as well as follow-up support, ARATA seeks to expand the scope of this value-adding expertise to encompass all manner of retailers, including those operating online and overseas.
Marketing producer: As a wholesaler acting as intermediary between manufacturers and retailers, ARATA possesses a wealth of real-time information spanning the entire supply chain. Through value-adding analysis of this data, the company seeks to devise attractive proposals that bring enjoyment to consumers’ shopping experience.
Business
Business model
ARATA mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company handles around 100,000 items (such as cosmetics and other Health & Beauty products, detergents, paper products), which it buys from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to almost all Japanese retailers (around 45,000 stores operated by 3,500 companies, including drugstores, supermarkets, and DIY centers). Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time. The company has systems in place to handle detailed customer orders, including orders as small as a single toothbrush.
In FY03/21, the company posted sales of JPY834.0bn, which we estimate would be about JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is comparable to that of top-10-ranking retailers in Japan.
As indicated below, ARATA’s wide range of products excludes foods, apparel, consumer electronics, PCs, and mobile devices, which all vary in distribution channels. The company breaks down the products it handles into six categories:
Generally speaking, the Health & Beauty, Home Goods, and Pet Goods/Other categories are the main drivers of growth. While there is some variation between products, the gross profit margin for the Health & Beauty category is higher than for other categories. Within the Health & Beauty category, cosmetic products have relatively high unit prices and therefore a high gross profit margin. Moreover, their small size helps minimize packing and transportation expenses (a component of SG&A expenses).
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
By customer type, sales to drugstores have the highest weighting (50% of FY03/21 sales), followed by sales to DIY centers (16%), supermarkets (13%), discount stores (7%), general merchandising stores (GMS) (5%), and other customer types (10%). Previously, convenience stores had been an important source of business for ARATA, but such sales have dwindled since Circle K Sunkus merged with FamilyMart and changed its procurement policies. Sales to online retailers remain small, and fall into the other customer types category. The company tends not to be reliant on individual customers; the only customer accounting for more than 10% of sales is Tsuruha Holdings (TSE1, 3391), which in FY03/21 made up 13.3% of sales.
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
The company’s GPM is generally between 10% and 11%. The average between FY03/16 and FY03/21 was 10.3%, with 10.5% being the highest and 10.3% the lowest (in FY03/21). Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company has the ability to make proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data (available for free or for a fee to retailers and manufacturers) that it can use to identify what is being sold and where, at any particular time.
Accurate deliveries from logistics centers a source of added value
The company believes the logistics capabilities that enable it to respond accurately even to small orders are a source of added value. A wholesaler’s role is to efficiently distribute products from multiple manufacturers to multiple retailers. ARATA works to ensure accurate and inexpensive product distribution, mainly through the operation of 11 large logistics centers across Japan, each capable of handling product volumes worth more than JPY15.0bn per year.
Products are typically delivered from manufacturers to logistics centers, where they are inspected, manually sorted, and then transported to large automated warehouses or areas for handling in smaller lots. In the past, after products arrived at a logistics center and were inspected, stickers were affixed at a designated location, and then first-round sorting was necessary. However, ARATA’s state-of-the-art logistics centers now employ systems that streamline the receipt of goods. Developed in cooperation with manufacturers, these systems allow employees on the distribution end to simply wave a handheld terminal over the goods, automating the first-round sorting process. Even a medium-sized logistics center handles 40–50 trucks per day. Making forwarding operations more efficient helps to reduce operational mistakes, decreases truck congestion at logistics centers, and reduces the number of trucks waiting to be unloaded. (Shortening the long hours required for loading/unloading trucks helps lower transport costs.)
For small-lot deliveries, the company relies on human capabilities and mechanical checks to ensure that operations are efficient and mistakes are kept to a minimum. ARATA has introduced AiMAS, picking carts equipped with scales, at its logistics centers. Employees follow the instructions on a cart’s screen, taking products off shelves and placing them on the cart. A bar code confirms that the correct products are taken, and the cart senses the weight of the cart before and after the product(s) have been added to confirm that the quantity is correct. The company uses such systems to make deliveries, in quantities as small as a single toothbrush, to 45,000 stores operated by some 3,500 companies, with a misdelivery rate of less than 1/100,000.
The Kyushu Minami center, the company’s newest facility, has an AI-equipped depalletizing robot. Due to the sheer number of items the company handles, the task of locating the right container of goods from the vast number of containers stacked on pallets, and placing it on the conveyers for shipping yielded a number of permutations so large that robot programming was impracticable. For that reason, until recently, the company relied on humans for this task. However, the company has eliminated the need to program the robot by using a system comprising 2D/3D cameras and deep learning functionality, improving operational speed. As a result, work that previously required six employees can now be handled by one. The company makes capital investments of JPY3.0–5.0bn per year; by using state-of-the-art distribution systems, it aims to handle more quantity without increasing the total number of employees, while ensuring accurate and efficient deliveries.
Information system that facilitates one-stop service
The company has an information system to ensure the accuracy of orders it places and receives for the 100,000 items it handles. It uses an electronic data interchange (EDI) backbone provided by Planet (TSE JASDAQ Standard: 2391). Investors in Planet include manufacturers of everyday items such as Lion (TSE1: 4912) and Unicharm (TSE1: 8113), as well as Intec (now TIS [TSE1: 3626]). Planet was established to create systems for communicating data between wholesalers and manufacturers of everyday items, sundries, and cosmetics. ARATA has been working with Planet on EDI backbone development since that company’s establishment, helping it create a framework for accurately handling information regarding the placement and receipt of orders between manufacturers and distributors. Planet also provides a supplementary service for small and medium-sized manufacturers without the wherewithal to install the EDI backbone. The service helps ensure the accuracy of information ARATA exchanges with these manufacturers, as well.
Different retailers use different systems for placing orders, but most are compliant with the distribution Business Message Standard (BMS). The distribution BMS arose as the result of an April 2007 project ran by the Ministry of Economy, Trade and Industry that aimed to standardize distribution systems so that EDIs could use specifications common among members of the distribution sector (manufacturers, wholesalers, and retailers). Distribution BMS compliance accelerates and reduces the cost of communicating data on order placement, shipping, receipt, inspections, and invoicing among these members. In the past, transferring data on order receipt and placement could be time-consuming, owing to limitations on telecommunication speed. Currently, such data can be transmitted and received rapidly and accurately. ARATA outsources management of the EDI system it uses for order receipt and placement with retailers (its customers).
Since 2011, the company has used InfoFrame DWH Appliance, an ultrahigh-speed data analysis platform provided by NEC (TSE1: 6701), and in March 2019, the company transitioned to NEC’s next-generation product, the Data Platform for Analytics (DP4A). Each day, the company receives data on orders received from retailers and has thereby amassed a huge volume of data over time. The company uses this information in sales activities, to improve distribution efficiency, and to provide feedback to manufacturers. Before introducing NEC’s platform in 2011, the company used its own dbQuest search system for extracting data. At busy times, particularly at the beginning and end of each month, search requests could take anywhere from dozens of minutes to several hours, limiting the number of searches possible.
The NEC system increased search speed by approximately 100 times, making it possible to use the data for a variety of purposes. Currently, the company uses it to manage profitability by customer and product group. In the future, it intends to utilize the DP4A’s machine learning function to increase the amount of data it sells. In such ways, the company says it uses third-parties effectively to build information systems at little cost.
Advice on creating successful retail spaces
Shared Research understands that the company stands out in the industry for its ability to make proposals that connect manufacturer promotions with instore retail methods. Facilitating such proposals is Dentsu Retail Marketing (DRM), an equity-method affiliate the company established in November 2006 along with Dentsu Tec Inc., a subsidiary of Dentsu (TSE1: 4324), NEC (TSE1: 6701), and Dai Nippon Printing (TSE1: 7912). Dentsu is a leading advertising agency with the top domestic market share and handles the creation of TV and online ads for many companies including manufacturers. ARATA has a 21.6% stake in DRM (previously 20%). DRM’s services include consulting on the analysis and use of customer purchasing data, planning and creating sales promotional tools tailored to store- or region-specific demand, managing instore product displays, and putting sales promotion tools in place in stores. Through DRM, the company works to maximize the combined effectiveness of different types of advertising and instore retail spaces. Recently, the company has been stepping up its efforts to create spaces in tie-ups with regional TV stations and newspaper advertisements. In addition to advertising products nationwide, the company creates plans to capitalize on regional events and proposes to retailers plans that link the three: special events, ads, and products. In May 2020, ITOCHU Corporation (TSE1: 8001) also took a stake in DRM.
In April 2007, the company established ISM Corporation as a subsidiary. As requested by manufacturers, employees of this subsidiary visit individual stores, particularly chain stores, at a specified time on a certain day to monitor store conditions, help design retail spaces, and provide feedback to the manufacturer. The service is designed to promote the effective nationwide rollout of products while helping create retail spaces that are on-trend. The company provides added value by offering advice on how to design “spaces that sell.”
The company’s SG&A ratio (SG&A expenses to sales) is generally between 9% and 10%. Over the past five years, the ratio has averaged 9.2%, with a high of 9.6% in FY03/16 and a low of 8.9% in FY03/21. Of this figure for the five-year average through FY03/21, salaries and allowances and packing and transportation expenses have been the equal largest components, averaging 2.6% of sales during the period. Sales grew 18.4% from JPY704.6bn in FY03/17 to JPY834.0bn in FY03/21. The number of employees (consolidated basis) increased a modest 2.4% from 2,926 at end-FY03/17 to 2,997 at end-FY03/21, and salaries and allowances were up only slightly. Administrative division productivity improved thanks to consolidation of business centers, adoption of robotic process automation (RPA), and a complete overhaul of operation manuals. Packing and transportation expenses, meanwhile, rose due to higher freight volumes and trended upward as a percentage of sales due to higher freight rates.
OPM was 1.0% in FY03/17, 1.2% in FY03/18, 1.2% in FY03/19, 1.2% in FY03/20, and 1.4% in FY03/21. Since FY03/17, gross profit has risen in tandem with sales, outpacing growth in SG&A expenses and resulting in sustained but moderate improvement in OPM. Packing and transportation expenses rose, but the company was able to maintain the overall profit margin by controlling employee numbers through productivity and efficiency gains, thereby minimizing increases in salaries and allowances and other personnel costs.
Market and value chain
Sales rising slightly more than drugstore sales
Drugstores are the company’s largest customers, by percentage of sales. The top-selling product categories reflect this: Health & Beauty (mainly cosmetics and oral-care products) and Paper Products (mainly baby diapers, sanitary goods, and toilet paper) are sold in drugstores. Total drugstore sales across Japan have grown by a CAGR of 5.6% between FY2016 and FY2020 (from JPY6.49tn to JPY8.04tn). The company’s sales have climbed by a CAGR of 4.3%, from JPY676.7bn in FY2016 (FY03/17) to JPY834.0bn in FY2020 (FY03/21). The company’s sales have grown at roughly the same rate as that of drugstores.
Looking at trends in the drugstore industry, large drugstores have been seeking to increase sales by aggressively opening new stores and through acquisitions. Meanwhile, small and medium-sized drugstores have been closing, accounting for a shrinking market share. ARATA delivers products to all the big drugstores in Japan. These drugstores make up a growing share of the market, driving up the company’s sales. By customer type, ARATA’s sales to drugstores have been rising at a CAGR of 5.9%, outpacing the growth rate of the drugstore industry itself. Major drugstores have established many tax-free stores to capture increasing demand from inbound tourists. Shared Research understands that ARATA’s ability to abundantly supply these stores with items popular among inbound tourists has contributed to its growth.
However, the company has not benefited completely from sales growth in the large-drugstore subset. Sales at the seven largest drugstores in Japan grew at a CAGR of 7.4% between FY2016 (JPY3.6tn) and FY2020 (JPY4.8tn), rising faster than ARATA’s sales. The reason is that large drugstores have accelerated growth by stocking food items, which make up only a tiny proportion of the company’s products.
Among drugstores, the company’s sales to Tsuruha Holdings make up more than 10% of total sales, requiring a separate breakdown in its annual securities report. (In FY03/21, sales to Tsuruha were JPY110.8bn, or 13.3% of the total.)
The company also sells product to other customer types, so sales growth is affected by their performance, as well. Over the past five years, ARATA’s sales to discount stores have risen by a CAGR of 4.7%. Among key customers, store numbers have grown, and discount stores have also benefited from increased demand from inbound tourists. On the other hand, sales to DIY centers have risen 2.1%, sales to supermarkets have risen 4.0%, and sales to general merchandise stores (GMSs) have fallen 1.8%. Sales to convenience stores are no longer on a meaningful scale, falling as convenience stores have restructured and changed their procurement policies.